Today’s must read MSM piece is a 4500 word beastie, ostensibly about the iPhone, but actually about the broader technological trends that drive the economy, especially regarding employment. It reveals what happens when we shift low cost jobs overseas — the impact is a variety of more sophisticated, higher paying technological jobs follow as well. The video “iPhone Economy” is especially informative.

In the print edition, there is a fantastic graphic showing the change in Manufacturing versus Service Jobs; unfortunately, it is nowhere to be found on line (not even Economix), but I will make discreet inquiries.

Meanwhile, its your reading assignment for today.

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Source: How U.S. Lost Out on iPhone Work
CHARLES DUHIGG and KEITH BRADSHER
NYT, January 21, 2012 http://www.nytimes.com/2012/01/22/business/apple-america-and-a-squeezed-middle-class.html

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

24 Responses to “iEconomy Shifts Labor Trends”

Foxconn was the recipient of massive government subsidies (“The Chinese government had agreed to underwrite costs for numerous industries, and those subsidies had trickled down to the glass-cutting factory”).

It also benefited greatly from China’s exchange rate policy, which artificially depresses the value of the yuan against the dollar, making Chinese workers and exports more attractive compared to US.

The US chooses to protect segments of the population other than middle class workers. For example, the protections of licensing for doctors and lawyers, the protections for the financial sector (massive bailouts), the protections for IP owners (resulting in higher drug and media prices benefiting their owners at everyone else’s expense), exchange rate policies (hurting exports and manufacturing workers), monetary policy (protecting wealthy creditors).

The thing that I find interesting is a nugget that I don’t believe is present in the article … Foxconn is not a mainland China company, but is rather a subsidiary of Hon Hai, a Taiwanese corporation, and has plants all over the globe.

Kinda makes one take a step back regarding our “protection” of Taiwan … another situation where our foreign policy is as screwed up as possible …

And the other thing that bothered me is the thinly-veiled attitude that the Chinese workers are being abused, and are practically “slave labor”. The working conditions inside Foxconn are state of the art, and the hideous number of hours worked by the employees (who are free to quit at any time, I believe) are reminiscent of labor hours in the US, prior to Henry Ford’s revolution in employee treatment, doubling wages while slashing the work week, actions that got him branded as a “socialist”.

Foxconn is raising the wage levels and standard of living of the average Chinese faster than they have ever been increased before … I see this as a struggle between the Taiwanese culture and the mainland Chinese culture, with the Taiwanese winning. Eventually, the two will merge, and it will be all but impossible to tell who converted the other.

Finally, I saw one area of congruence between Apple (or at least Steve Jobs) and Foxconn … both placed customer satisfaction above all else, and would move Heaven and Earth to make it happen. I see that is the basic reason behind both their successes.

“Though Americans are among the most educated workers in the world, the nation has stopped training enough people in the mid-level skills that factories need, executives say.”

I, Francisco Bandres de Abarca, call “bullshit!” The nation–or more correctly, manufacturers–have greatly reduced the provisioning for apprenticeships (on the factory floor training), simply because it is cheaper to outsource to a labor plantation country-based (e.g., Chinese military co-managed) company, where on-the-job training is commonplace.

“In part, Asia was attractive because the semiskilled workers there were cheaper. But that wasn’t driving Apple. For technology companies, the cost of labor is minimal compared with the expense of buying parts and managing supply chains that bring together components and services from hundreds of companies.

For Mr. Cook, the focus on Asia “came down to two things,” said one former high-ranking Apple executive. Factories in Asia “can scale up and down faster” and “Asian supply chains have surpassed what’s in the U.S.” The result is that “we can’t compete at this point,” the executive said. ”

Well, uh . . . none of that would be contingent upon the underlying factor of greatly reduced labor costs enabling a much lower cost structure throughout the supply and assembly chain, now would it? Nah.

Off on a tangent . . . I’m reminded of the story of how Joe Kennedy (yes, that same former ambassador to London) advised some of his wealthy friends to invest more heavily in Nazi Germany rather than the UK, because the British were unlikely (in his opinion) to fare well in the brewing conflict (WWII) to come.

Much innovation comes from the factory floor and not from mahogany row. The classic example is NUMMI. It was the worst automobile factory in the US when GM — where all wisdom (at least at the time) resided on mahogany row — owned it. When they set up NUMMI and Toyota took over management, it became one of the best. Same equipment, same people, different management. They encouraged employee suggestions and implemented around 95% of them. Under GM if a worker stopped the line, both he and his boss were subject to firing. Under Toyota, if something went wrong, workers were encouraged to stop the line and they immediately sent a team to fix the problem both locally and wherever else a fix was needed. (Some of this is on a program in the archive of This American Life. The rest was learned at an SRI course on innovation.)

The bottom line is that a lot of innovation, both in production and new products, comes from the production line. Move it offshore and the innovation moves offshore.

I love it when people like “constant normal” talk about the chinese factories as if they had a clue what’s going on over there. Somehow i doubt it’s quite as pleasant as constant implies, and i’m certain leaving isn’t as simple as “they can quit anytime they want.”

Anyway, here’s an article about the factory, stringing nets to catch people as they attempt suicide by flinging themselves to death out the dorm windows. Actually maybe they’re trying to kill themselves, maybe they’re jumping for joy at living in such state of the art factory. Sounds awesome.

this article is an important read. No matter where you stand on the noisy right/left fights about spending and taxes this discussion will echo into the future about the priorities on which policies are based. These priorities change as other forward looking concerns change. That may well be obvious to many but consider last week for a minute:

When the SOPA noise peaked last week someone pointed out how special interest money influences both sides and how legislators try to do what is best. The problem with giant lobbying funds framing a public discussion is how the discussion is not guaranteed to be broadly framed or fully detailed. This was one of those times and it appears afterward to have been an attempt at an end run. The losing side in last week’s fight will regroup and invite more friends to their side, so I do not think it is over. Will the next rounds be more angry rhetoric that loses the BP in a nationalist argument?

What is the social benefit of having management here in the US and production elsewhere? That point offers an attempt to address this issue but how about basing broad tax policy on the long term social priorities. I know the big arguments that will immediately follow and they will most certainly frame the discussion narrowly and in sound bites (as SOPA supporters tried to do). But what if TBP changes?

Foxconn would only need to be invented (as ToNYC suggests) if the broad policy in place made that the best choice. I am not a left wing thinker but this discussion has been framed a lot like the economic arguments that led to the civil war and yet when free labor was stopped the economy adjusted & did not implode. It grew. What really matters and how can we get there? How can manufacturing jobs not be part of America’s future? There should be an ongoing framework for public disclosure about the detailed tradeoffs it would take to bring manufacturing back here. Skip the sound bites and let’s hear the detail. More transparency is needed and ultimately will be demanded. Tax policy needs to be looked at from all sides and the discussion cannot be framed only by special interests as if it is hurried process fighting a clock that does not exist. The light shined on SOPA/PIPA should remind us to look closer at old arguments.

I have a somewhat different take – it’s less that we’re not training the mid-skill workers, it’s that they’re being replaced by automation. You see this in almost any setting. Sure, in China right now, oodles of manual labor is being used instead of automation (example – in some Chinese factories that my employers runs, things we automated decades ago are still purely manual), but that’s a transient situation. This is true even at Foxconn if you listen to the CEO’s plans for robotizing his factory floors. You’ll still need mid-level skills to service the automation, but a lot less than is now used on the floor. The situation is akin to the industrial revolution when vast amounts of human physical labor was replaced with machine labor. We now have a situation where repetitive mechanical skill and low level decision making is being replaced by the machine equivalent.

Therein lies the rub. We have a society in which ultimate capabilities and achievable skill sets are diverse. If you have a high level skill set, you’ll pretty much do fine in every conceivable scenario and a few will have a chance to succeed beyond their wildest dreams. Everyone else faces a bit of a challenge, just as they did at the dawn of the industrial revolution. However, it’s a lot more obscure as to what comes next to take advantage of the existing base of idled human capital. It’s not as though there’s a dearth of things that need to be done (like rebuiliding and maintaining our infrastructure), but too many have lost sight of the essential features of the social contract in a specialized society and seem to think that rugged individual self-reliance will somehow cure all.

I worked for Foxconn for a few years, and I am still in the electronics industry. This article is fairly accurate, as far as it goes. For example, the details of how little an impact worker wages have on the bottom line is accurate, and an important point to consider.

But the other factors that make manufacturing like this possible in China and other portions of the developing world are not discussed. The real deal killers to US production are regulations such as OSHA, EPA, nimbyism, and more local issues like zoning and property taxes.

Not that I don’t appreciate things like OSHA and EPA. China is absolutely RAPING its environment, and it will eventually pay a price for that. Life and limb is certainly too lowly valued there. And those are values that are hard to compete against, in the short run at least.

But bottom line, it is simply impossible to build such a factory in the US in the current environment, even if folks were willing to work for $20 a day. The building could be built, but it would need to be in a location so remote that workers would need to be bussed in from hundreds of miles away.

And look how easy it was just this week for Obama to shut down a huge middle class job generating project, which makes sense on so many levels, with the mere flick of his wrist. Not that I blame him. It’s just a timely example. Even if he did approve the pipeline, it would no doubt be fought at the state and local levels for years.

This study also confirms our earlier finding that trade statistics
can mislead as much as inform. Earlier we found that for every $299
iPod sold in the U.S., the U.S. trade deficit with China increased
by about $150. For the iPhone and the iPad, the increase is about $229
and $275 respectively. Yet the value captured from these products
through assembly in China is around $10.

The NYT didn’t do very thorough research. They obviously left out:
- environmental regulations
- (chinese) state-sponsored (over)investment (factory capacity is just like their housing bubble)
- crowding out of many private sector jobs by government jobs which are exposed to globalization (why, work hard to get even a community college degree in industrial engineering or technician in manufacturing when you could get a mechanical maintenance gov job?)
- short-sighted decisions by American managers for decades, as “manufacturing know-how” migrated; the Germans never did that and look how strong their middle class has been.
- unions (the 70s militantism started the move overseas)

By the way, when an executive tells you something publicly, get a brain, it’s bound to be inaccurate and self-serving. The only executive I would trust would be Andy Grove … and where are his manufacturing plants …

More expediency and short-sighted profit obsession (what part of 40% margins forces one to stay focused overseas to remain competitive?) masquerading as efficiency and effectiveness. The only country playing the game this way is the USA: Japan, Germany, China, et al, have no interest in it doing it our way… So, is it a master stroke of American strategy? But I wonder how Mr. Jobs figured that Americans would be able to keep paying top dollar for his products, if our economic activity consists solely of selling houses, financial plans, and yoga classes to each other?

“We were told we would have to do 12-hour days, and come in on Saturdays,” Mr. Saragoza said. “I had a family. I wanted to see my kids play soccer.”

“A foreman immediately roused 8,000 workers inside the company’s dormitories, according to the executive. Each employee was given a biscuit and a cup of tea, guided to a workstation and within half an hour started a 12-hour shift fitting glass screens into beveled frames” …the executive said “There’s no American plant that can match that.”

“What U.S. plant can find 3,000 people overnight and convince them to live in dorms?”

“We sell iPhones in over a hundred countries,” a current Apple executive said. “We don’t have an obligation to solve America’s problems.

Americans have created an excessively high cost structure. There is no reason Americans can’t have a high standard of living at $8/hour, and that is within shouting distance of third world wages. Problem is that Americans have incredibly expensive healthcare, transportation and housing expenses, though the housing problem seems to be abating. Our ancestors did without healthcare entirely and they survived. Those of use born in the 1950′s survived quite well with old-fashioned technology. Not saying that modern technology is useless, by any means. But clearly we are going overboard with healthcare spending and that is making the US uncompetitive. There is no need for everyone to have a car. Our ancestors walked. Aside from being free, walking is good exercise. Single family houses on a 1/8 acre lot should cost maybe $30K, not $300K. We’re getting there in the rust belt, and already blown threw that figure in Detroit, but still have a ways to go in Silicon Valley. And of course it is absurd for people to go into debt for college and then require high-paying jobs to pay off that debt. Instead, people should self-educate for free.

American businesses rightfully have no faith that they can find skilled workers in America right now at $8/hour. But that is where American wages are headed (in nominal terms). Once Americans have had their cost structure beaten down so that skilled workers will work for $8/hour, jobs will return to America, given that labor is a small part of total costs and there are many reasons for preferring to have factories located in America (less corruption, less political risk, reduced transportation costs to final consumers in the United States, cheaper energy in some cases). But that will take a while.

The article that is the basis for this post makes the point that it is NOT just labor costs, but rather, the entire manufacturing infrastructure that has shifted. And its not the lack of $8 skilled workers, its far more sophisticated engineers and designers,

Why High Tech Manufacturing Jobs Aren’t Coming Back to the U.S.
January 22nd, 2012

Via: New York Times:…

“…“The entire supply chain is in China now,” said another former high-ranking Apple executive. “You need a thousand rubber gaskets? That’s the factory next door. You need a million screws? That factory is a block away. You need that screw made a little bit different? It will take three hours.”

…

Another critical advantage for Apple was that China provided engineers at a scale the United States could not match. Apple’s executives had estimated that about 8,700 industrial engineers were needed to oversee and guide the 200,000 assembly-line workers eventually involved in manufacturing iPhones. The company’s analysts had forecast it would take as long as nine months to find that many qualified engineers in the United States.

“…Since this nonsense is being mandated in schools, what will be the long term consequences of children spending even more time looking at screens? Apple doesn’t have any options for reading its locked-down content on anything other than conventional computer screens. At least with E-ink and other electronic paper displays, one gets an experience that’s more similar to reading text on regular paper.

What will be the long term consequences of children reading ebooks with stuff spinning and blinking right next to the text that they are supposed to be comprehending:

Mayer and Moreno have studied the phenomenon of cognitive load in multimedia learning extensively and have concluded that it is difficult, and possibly impossible to learn new information while engaging in multitasking. Junco and Cotten examined how multitasking affects academic success and found that students who engaged in more multitasking reported more problems with their academic work. (Wikipedia: Human multitasking)

But that dazzling, distracting iCrackPad vending machine is the future of learning? It’s the answer to decades of disastrous, lobotomizing sKo0l?

Like the author of the piece below, I also think that ebooks are inevitable. This shift to video game style learning is well underway. But if something like the Kindle is disturbing, this iBooks thing is an order of magnitude more so. It’s not some sci-fi dystopic concern that’s always 20 years out.

I was born in the 50′s and a blue collar worker. Thank god for regulations. I often worked different shifts and long hours and that was never a problem. I was young and needed the money for a roof over my head. I had ambitions of moving into the middle class!

Perverse, sick, obscene, greed on the scale of the guilded age. WTF, did the article state profits of $400,000 per employee?

24/7 dormitories and tea and biscuits; How delightful. What a swell way to live. Like a work dog in a kennel.

We allow this behavior. Who the hell needs an over priced Apple product? Things are our addiction. Like the gotta have expensive jeans, or tricked out vehicle, or home you will lose if one of you falls ill. My god, bring the jobs home and share the prosperity. Get a grip people; Do you stand in line for the latest and greatest junk (you chuck it as soon as something is new so what you just purchased must be crap).

It is always illuminating, if not a little predictable, to read the comments section of the New York Times. A fairly balanced analysis of Apple and offshore manufacturing in this week-ends’ edition has generated well over 500 comments, most of them howls of outrage at the the greed of Apple and demands for government action in the form of tariffs. In the same section of the New York Times is an article on government mandated disclosures to consumers and whether they are useful or not.

Well one thing for sure is the fact that it is extensively disclosed to Americans that much of what they consume is manufactured, at least partially, abroad. Despite this they continue to buy products that are not “made in the USA” in large quantities. It is reasonable to believe that many of the individuals who felt so moved by the article on Apple to take the time to comment are actually Iphone owners, who had 11.2% of the US market at the the end of November 2011. If not Iphone owners they probably were proud owners of the devices made by the number 1 and 2 companies, in terms of market share, Samsung and LG, both non US companies.

So what we have is on the one hand are a large number of people claiming to want government imposed tariffs on foreign goods, which would effectively raise their cost and therefore retail price, whilst on the other hand you have the majority of consumers deciding to ignore their apparent patriotic and intellectual outrage at the exporting of American jobs and happily enable the loss of the aforementioned jobs by purchasing “foreign” goods.

It seems many Americans express a theoretical desire to create jobs in America when discussing the issue of tariffs, and so on, yet make an entirely different statement when pulling out their credit cards. Perhaps the explanation for this dissonance is that tariffs on imported products are an abstract cost that are difficult to directly relate to the retail price of goods on the shelves whereas the sticker price on an individual item is very real and one of the primary determinants in a purchasing decision.

It is always telling to see what armchair political commentators and policy makers do rather than what they say.

“Bonzo” would have us believe America can simply deflate our way to a new future. Bonzo may want to do some research on the Great Depression and report back on how that worked out.

To me, this article is instructive on the many symptoms of the problem. However, the over-arching issue is the future of work in the United States. The transition in the American workforce began rather gradually and quietly in the 1980′s, but appears to have achieved critical mass in the late-90′s onward to today.

While we absolutely should examine the examples of Apple, Foxconn, etc., this issue is much larger than these firms. It seems we’re amidst a structural change with long-term implications that most Americans are only beginning to consider.

The favored education level in China is a few year’s college (but less-than a Bachelor’s degree). So is the implication that because a large chunk of our labor pool is “over-qualified” that they wouldn’t accept technical training? Or is it more a wage arbitrage issue?

How much of this shift is truly due to over-regulation in the States, versus the (nearly) complete lack of regulation? How big a factor is the aggressive tax benefits being offered elsewhere?

Besides the obvious impact on job and wage losses, there’s insidious loss of skill capacity across a growing segment of the population. If the market-based economy is eliminating skill-based local production, what are the implications from an economic, competitive and environmental standpoint?

Finally, is this the best path forward? Is it the only path? Do we not have areas where we could be productively applying our idle human capital to lay the groundwork for our future?

To me, this article is instructive on the many symptoms of the problem. However, the over-arching issue is the future of work in the United States.

While we absolutely should examine the examples of Apple, Foxconn, etc., this issue is much larger than these firms. It seems we’re amidst a structural change with long-term implications that most Americans are only beginning to consider.

The favored education level for these jobs in China is a few years’ college (but less than a Bachelor’s degree). So is the implication that a large chunk of our labor pool is “over-qualified” thus they wouldn’t accept technical training? Or is it more a wage arbitrage issue?

Besides the obvious impact on job and wage losses, there’s insidious loss of skill capacity across a growing segment of the population. If the market-based economy is eliminating skill-based local production, what are the implications from an economic, competitive and environmental standpoint?

How much of this shift is truly due to over-regulation in the States, versus the (nearly) complete lack of regulation? How big a factor is the aggressive tax benefits being offered elsewhere?

Finally, is this the best path forward? Is it the only path? Do we not have areas where we could be productively applying our idle human capital to lay the groundwork for our future?

The issue is that the PRC is a command economy run by capitalists. The Communist party recognized a long time ago it could not stay in power unless is could provide jobs to its people that created not only real but useful things- look at the quality of the things manufactured during the Great Leap forward. Multiplying/manipulating their education system to provide a useful manufacturing worker they have achieved their goal of providing jobs. The parties problem will be how to accommodate their red entrepreneurs w/ political freedom. Giving them Green cards to invest in projects here is a bad idea as it will only reinforce the culture of law for the wealthy.
To return middle class jobs here will require a mind set change that I’m not sure we’re are capable of short of losing a nuclear war.

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